DERBYSHIRE GB / APR 14 - This is the US Dollar Forex Playbook and contains analysis based on the US Dollar Forex Reference. It is intended to be used as a guide to aid in your analysis.
WILL THE DOLLAR GO LOWER?
Sentiment towards the US economy has been shaky in the past month, as the banking crisis has developed. This gives credence to the long-held belief that the Fed will need to make a dovish pivot, especially as CPI falls further than expected.
The CME FedWatch tool currently has a 80% chance of a quarter-point rate hike in May, but cuts are beginning to be priced in from July. The odds of a cut in September are even higher.
Next week has no significant economic events for the US, so any rallies in the US dollar are likely to be short-lived. The expected Fed cuts will reduce borrowing costs and spur economic growth.
Based on the research and analysis in this report, the US dollar is not expected to sustain rallies beyond the $102.00 area in the short term. A re-evaluation will be conducted if sentiment shifts during the week of April 17th.
FUNDAMENTAL ANALYSIS
THE FEDERAL RESERVE
On March 22, 2023, the Federal Reserve made the ninth consecutive interest rate hike, raising the Federal Funds Rate to a range of 4.75% to 5.00% from the previous range of 4.50% to 4.75%.
Following the meeting, the Fed released an updated statement that made minor changes from the previous release. All mentions of the war in Ukraine were removed, and the statement now emphasises the impact of the banking crisis on credit conditions and inflation. The biggest change is the removal of a line indicating that there will be ongoing increases in interest rates. Instead, the statement says that "additional firming may be appropriate," suggesting that the Fed will take a more data-dependent approach to setting interest rates in the future.
The Fed will meet again on Wednesday, May 3, 2023, to decide on further interest rate changes.
THE US ECONOMY
QUARTERLY GDP GROWTH RATE: The latest data is for Q4 2022 which at a 2.6 percent expansion is lower than expected. Previously, the outlook for GDP was classified as ‘pessimistic deterioration’ and following the latest report, it remains the same.
ANNUAL CPI RATE: The latest data is for March which at 5.0 percent inflation is lower than expected and much lower than the previous 6.0 percent. Previously, the outlook for CPI was classified as ‘indifferent improvement’ but has now become ‘optimistic improvement’.
UNEMPLOYMENT RATE: The latest data is for March which at 3.5 percent is slightly better than expected although the FOMC are projecting it to rise to 4.6 percent in 2024. Previously, the outlook for unemployment was classified as ‘indifferent deterioration’ but following the downside surprise in March, it has become ‘slightly optimistic deterioration’.
SENTIMENT ANALYSIS
FED POLICY NARRATIVE
The outlook and trajectory of the Federal Funds rate has been a major concern for Forex traders since inflation began to overheat in 2020. The value of the US Dollar (DXY) has been trending upwards throughout the tightening cycle, although there have been dips when speculators have anticipated a potential Fed pivot.
However, the value of the DXY plummeted from nearly $106.00 in March to $101.00 in April as the banking crisis unfolded. This can be attributed to the growing sentiment that the Fed will not continue with its hawkish tightening policy during a time of economic uncertainty. Additionally, with the inflation rate quickly falling, some loosening of conditions may be appropriate sooner than planned. The Fed has projected that rates will fall from a peak of 5.1% this year to 4.3% next year.
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